Justification for Adoption of Administrative Rules

JUSTIFICATION FOR ADMINISTRATIVE RULE ADOPTION

Service Contract Providers and Administrators

16 TAC Chapter 77, amendments to §§77.10, 77.70, and new §77.26

The Texas Commission of Licensing and Regulation (Commission) adopts a new rule at 16 Texas Administrative Code (TAC), Chapter 77, §77.26, and adopts amendments to existing rules at 16 TAC Chapter 77, §77.10, and §77.70, to implement Senate Bill 1199, 85th Legislature, Regular Session (2017), regarding the Service Contract Providers and Administrators program, without changes to the proposed text as published in the February 23, 2018, issue of the Texas Register (43 TexReg 985). The rules will not be republished.

JUSTIFICATION AND EXPLANATION OF THE RULES

The adopted rules are necessary to implement Senate Bill 1199 (S.B. 1199), 85th Legislature, Regular Session (2017). S.B. 1199 amended Texas Occupations Code Chapter 1304 and expanded the definition of “service contract” to include agreements that provide compensation to the buyer of a vehicle on the total constructive loss under a depreciation benefit optional member program. The bill defined “depreciation benefit optional member program”; established requirements for and restrictions on automobile dealers that offer these programs; and required certain consumer protections for buyers of these programs. The statutory changes made by S.B. 1199 were effective September 1, 2017.

The adopted rules implement S.B. 1199 by adding new definitions; detailing provider requirements for depreciation benefit optional member program service contracts; and specifying responsibilities for providers and administrators of depreciation benefit optional member program service contracts. The proposed rules also attempt to integrate the changes made by S.B. 1199 into the existing statute and to reconcile duplicate statutory provisions regarding consumer cancellations and refunds.

S.B. 1199 expanded the existing definition of “service contract” to include depreciation benefit optional member programs. Now there are three types of service contracts under the statute: (1) service contracts that provide for the repair, replacement, or maintenance of a product or pay for the repair, replacement, or maintenance of a product; (2) identity recovery service contracts; and (3) depreciation benefit optional member program service contracts.

S.B.1199 included new consumer cancellation and refund provisions for depreciation benefit optional member program service contracts under Texas Occupations Code §§1304.003(e)(3) and (4); however, the existing statute already contained consumer cancellation and refund provisions under Texas Occupations Code §1304.1581, Cancellation By Service Contract Holder; Refund. Section 1304.1581 applies to all types of service contracts as defined under the statute, including depreciation benefit optional member program service contracts. Depreciation benefit optional member program service contracts now have two separate consumer cancellation and refund provisions within the same statute.

The staff of the Texas Department of Licensing and Regulation (Department) determined that the new provisions under Texas Occupations Code §1304.003(e)(3) and (4) do not conflict with and could be reconciled with the existing provisions under Texas Occupations Code §1304.1581, specifically subsections (b), (c), and (g).

Texas Occupations Code §1304.1581 provides additional details regarding consumer cancellations and refunds for all service contracts, including depreciation benefit optional member program service contracts. To reduce confusion and to assist service contract providers and service contract holders in reconciling the two-statutory cancellation and refund provisions, the adopted refer to the existing consumer cancellation and refund provisions under Texas Occupations Code §1304.1581, which apply to all types of service contracts, instead of the new provisions under Texas Occupations Code §1304.003(e)(3) and (4).

SECTION- BY- SECTION SUMMARY

The adopted rules amend §77.10, Definitions. The adopted rules add definitions for the following terms: buyer, dealer, depreciation benefit optional member program, identity recovery, service contract, service contract holder, and total constructive loss. Other terms have been renumbered as necessary. The adopted rules implement new Texas Occupations Code §1304.003(a)(2)(c) and §1304.003(a)(3), as added by S.B. 1199. Other terms have been copied from the statute and added to the rules to assist in the readability of the rules.

The adopted rules add new §77.26, Additional Provider Requirements--Depreciation Benefit Optional Member Programs. This new section sets out the additional requirements for a provider or its dealers who sell or issue service contracts that provide a depreciation benefit optional member program. This section refers to these service contracts as “depreciation benefit service contracts” to assist in the readability of the rules. This adopted new section implements new Texas Occupations Code §1304.003(e)(1), (2), and (5), as added by S.B. 1199.

However, the adopted new §77.26 does not include specific provisions regarding consumer cancellations and refunds for depreciation benefit optional member programs, as provided under Texas Occupations Code §1304.003(e)(3) and (4). Consumer cancellation and refund rights are addressed in the adopted amendments to §77.70.

The adopted rules amend §77.70, Responsibilities of Providers and Administrators. The adopted rules add a new subsection (f) to address disclosures specific to depreciation benefit optional member program service contracts. New subsection (f) implements Texas Occupations Code §1304.156, Form of Service Contract and Required Disclosures, and identifies specific terms and conditions regarding depreciation benefit optional member program service contracts that must be disclosed. New subsection (f) also requires disclosures regarding some of the restrictions and conditions set out under new Texas Occupations Code §1304.003(e). This section refers to these service contracts as “depreciation benefit service contracts” to assist in the readability of the rules.

The adopted rules under new §77.70(f)(5) refer to subsection (d) and the existing consumer cancellation and refund provisions under Texas Occupations Code §1304.1581, instead of the new provisions under Texas Occupations Code §1304.003(e)(3) and (4), as added by S.B. 1199. Section 1304.1581 provides additional details regarding consumer cancellations and refunds for all service contracts, including depreciation benefit optional member program service contracts.

To reduce confusion and to assist service contract providers and service contract holders in reconciling the two-statutory cancellation and refund provisions, the adopted rules refer to the existing consumer cancellation and refund provisions under §1304.1581.

PUBLIC COMMENTS

The Department drafted and distributed the proposed rules to persons internal and external to the agency. The proposed rules were published in the February 23, 2018, issue of the Texas Register (43 TexReg 985). The deadline for public comment was March 26, 2018. The Department did not receive any comments during the 30-day public comment period. There is no advisory board for this program.

At its meeting on May 24, 2018, the Commission adopted the rules without changes.

STATUTORY AUTHORITY

The amendments and new rule are adopted under Texas Occupations Code, Chapters 51 and 1304, which authorize the Commission, the Department’s governing body, to adopt rules as necessary to implement these chapters and any other laws establishing a program regulated by the Department.

The statutory provisions affected by the adoption are those set forth in Texas Occupations Code, Chapters 51 and 1304. No other statutes, articles, or codes are affected by the adoption.

§77.10. Definitions.

The following words and terms, as used in this chapter and Texas Occupations Code, Chapter 1304, have the following meanings:

(1) “Buyer” means a “service contract holder” as it relates to a “depreciation benefit optional member program.”

(2) “Dealer” means a motor vehicle dealer licensed under Texas Occupations Code, Chapter 2301.

(3) “Depreciation benefit optional member program” means a service contract financed under Chapter 348 or 353, Finance Code, that pays to the buyer, as a credit toward the purchase of a replacement vehicle at a participating dealer, an amount less than or equal to the difference between the purchase price and actual cash value for a total constructive loss.

(4) “Identity recovery” means a process, through a limited power of attorney and the assistance of an identity recovery expert, that returns the identity of an identity theft victim to pre-identity theft event status.

(5) “Qualified financial institution” means a financial institution organized and licensed under the laws of the United States, a state of the United States, or the District of Columbia.

(6) “Service contract” means an agreement that is entered into for a separately stated consideration and for a specified term under which a provider agrees to:

(A) repair, replace, or maintain a product, or provide indemnification for the repair, replacement, or maintenance of a product, for operational or structural failure or damage caused by a defect in materials or workmanship or by normal wear;

(B) provide identity recovery, if the service contract is financed under Chapter 348 or 353, Finance Code; or

(C) provide compensation to the buyer of a vehicle on the total constructive loss under a depreciation benefit optional member program.

(7) “Service contract holder” means a person who purchases or otherwise holds a service contract.

(8) “Third-party administration of a service contract” includes any of the following activities performed on behalf of a service contract provider:

(A) performing or arranging the collection, maintenance, or disbursement of money to compensate any party for claims or repairs pursuant to a service contract;

(B) participating in the processing or adjustment of claims arising under a service contract;

(C) maintaining records required by Texas Occupations Code, Chapter 1304; or

(D) complying with provider requirements, other than financial security requirements, of Texas Occupations Code, Chapter 1304.

(9) The term “third party administration of a service contract” does not include the performance of repairs, or clerical functions ancillary to the performance of repairs, by a repair facility that performs no other activities with respect to a service contract.

(10) “Total constructive loss” means a loss of such significance that the cost of restoring damaged property would exceed its value after restoration.

§77.26. Additional Provider Requirements--Depreciation Benefit Optional Member Programs.

(a) This section applies only to a provider who sells or issues service contracts that provide a depreciation benefit optional member program as described by Texas Occupations Code §1304.003(a)(2)(C). For purposes of this section, these service contracts are referred to herein as “depreciation benefit service contracts.”

(b) A provider or its dealers may not require the purchase of a depreciation benefit service contract as a condition of approval of a loan for the purchase of a vehicle.

(c) A depreciation benefit service contract may not be offered by a dealer who requires a loan for the purchase of a vehicle to be financed exclusively with the dealer.

(d) The fee or purchase price that is charged for a depreciation benefit service contract must be reasonable in relation to the benefit provided by the depreciation benefit service contract.

§77.70. Responsibilities of Providers and Administrators.

(a) The provider must clearly and conspicuously identify itself on all written service contracts and, on all written advertising materials that are used by the provider, its administrator(s), or its seller(s).

(b) The provider and/or any administrator appointed by the provider must provide service contract holders with a notification that meets all of the following requirements.

(1) The notification must provide the name, mailing address, and telephone number of the department.

(2) The notification must contain a statement that unresolved complaints concerning providers and administrators or questions concerning the regulation of service contract providers and administrators may be addressed to the department.

(3) The notification must be included on all written service contacts. The notification may be stamped on the contract or printed on a separate sheet and stapled to the contract.

(c) The provider and/or any administrator appointed by the provider must provide service contract holders with the provider's complaint resolution procedures.

(d) The provider and/or any administrator appointed by the provider must disclose the following information to service contract holders:

(1) the specific contract provisions and required disclosures in accordance with Texas Occupations Code §1304.156;

(2) the procedures and timeframes for a service contract holder to cancel a service contract in accordance with Texas Occupations Code §1304.1581;

(3) the procedures and timeframes for a provider to refund the purchase price of the service contract and pay any applicable penalty to the service contract holder in accordance with Texas Occupations Code §1304.1581; and

(4) the conditions in which the provider may cancel a service contract and issue a refund in accordance with Texas Occupations Code §1304.159.

(e) As part of the disclosures required under subsection (d), a provider and/or any administrator appointed by the provider who sells or issues service contracts described under Texas Occupations Code §1304.003(a)(2)(B) (referred herein as "identity recovery service contracts") must disclose the following information:

(1) the person or persons who are covered under the identity recovery service contract;

(2) the price of the identity recovery service contract separate from the purchase price of the automobile and any other products or services that are financed with the vehicle;

(3) the term of the identity recovery service contract; and

(4) any conditions that may change the stated term of the identity recovery service contract, including if the identity recovery service contract holder:

(A) pays off the automobile early;

(B) makes late payments or defaults on the payments on the automobile;

(C) refinances the automobile; or

(D) sells or transfers title to the automobile.

(f) As part of the disclosures required under subsection (d), a provider and/or any administrator appointed by the provider who sells or issues service contracts described under Texas Occupations Code §1304.003(a)(2)(C) (referred herein as “depreciation benefit service contracts”) must disclose the following information:

(1) the names and locations of the participating dealers who are part of the depreciation benefit optional member program;

(2) the amount of the credit that will be paid or the method of calculation that will be used to pay the credit toward the purchase of a replacement vehicle;

(3) a statement that purchase of the service contract is not required as a condition of approval of a loan for the purchase of a vehicle;

(4) a statement that a service contract may not be offered by a dealer who requires a loan for the purchase of a vehicle to be financed exclusively with the dealer; and

(5) a statement that the service contract may be cancelled by the service contract holder and the procedures and timeframes for a service contract holder to cancel the service contract and obtain a refund as specified under subsections (d)(2) and (d)(3).

(g) If not provided by the seller at the time of sale, the provider and/or any administrator appointed by the provider must provide a copy of the service contract to the service contract holder within a reasonable amount of time after the date of purchase that still allows the service contract holder the opportunity to cancel the contract and receive a full refund.

(h) If not provided by the seller at the time of sale, the provider and/or any administrator appointed by the provider must provide a receipt for or other written evidence of the purchase of a service contract to the service contract holder within a reasonable amount of time after the date of purchase that still allows the service contract holder the opportunity to cancel the contract and receive a full refund.

(i) A provider shall report to the department within 30 days any change in information required by §77.20 and §77.21.

(j) An administrator shall report to the department within 30 days any change in information required by §77.22 and §77.23.

(k) Upon notification by the department, the provider and/or any administrator appointed by the provider shall allow the department to audit records required to be maintained by Texas Occupations Code Chapter 1304. These records include copies of the service contracts marketed, sold, administered or issued in this state.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency’s legal authority.

Filed with the Office of the Secretary of State, on June 1, 2018.


Brian E. Francis

Executive Director

Texas Department of Licensing and Regulation